Matthew asked
"Is it theoretically possible for an economy to ever be allocatively
efficient within the PPF?"
My understanding has always been that it is impossible to have allocative
efficiency where productive inefficiency exists.
The classic case was with Nationalised Industries. Setting price equal to
marginal case will generate allocative efficiency only if there is no
productive inefficiency preventing production taking place on the LRAC. The
case for privatisation rested largely upon the belief that state controlled
industries were irredeemably productively inefficient and that consequent
welfare losses exceeded any losses from privatised industries setting P>MC.
Hence, given that producing within the PPC indicates productive
inefficiency, it is not possible for the economy to be allocatively
efficient.
Dave Sowden
Raffles Junior College, Singapore
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